TMI Blog2022 (7) TMI 1328X X X X Extracts X X X X X X X X Extracts X X X X ..... t the claim of the ld. AR that it is into product manufacturing. In determining the degree of comparability between controlled and uncontrolled transactions, it is necessary to compare the significant risks that could affect prices or profits. The risk involved for a company involved in manufacturing of equipments would be significantly different from the component manufacturing company. The assessee is a manufacturer of components and therefore cannot be compared with an equipment manufacturing company as per the principle laid down in Rule 10B(2)(b). In view of the above discussion, we hold that Roop Telsconic Ultrasonix Ltd. is functionally different from the assessee and cannot be included as a comparable. It is directed to be excluded from the comparables. Contract manufacturing segment - Comparability of the companies should be made with respect to functions, assets and risks. In the given case, Vikram India. Ltd. which is into manufacturing activities is not functionally comparable with the assessee and therefore, we delete the inclusion of this company from the comparables. Not providing working capital adjustment in relation to the Contract Manufacturing segment - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quidated damages and evidence in support of the same - DRP did not consider the additional evidence provided by the assessee and verify it for the reason of time constraint - HELD THAT:- Since the evidence and supporting bills submitted by the assessee are not verified by the lower authorities, we remit this issue to the AO to look into the facts and evidence afresh and decide the issue in accordance with law, after providing reasonable opportunity of being heard to the assessee. Disallowance of claims made by buyers pursuant to the slump sale - HELD THAT:- The assessee has submitted Form 3CEA to substantiate that the capital gain / loss is computed correctly. The certificate from the chartered accountant is issued based on the information and explanation provided to the best of their knowledge and the same does not prevent the AO from going into the root of the transaction calling for further evidence. In our view the onus is on the assessee to provide the required details as a foolproof evidence to substantiate the claim that the buyer deducted an amount from the final sale consideration. In the given case we notice that the lower authorities did not take call for any furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orm of carrying out license manufacturing activity and contract manufacturing activity are at arm s length, the assessee filed a TP study adopting Transactional Net Margin Method [TNMM] as the most appropriate method for determination of the Arm s Length Price (ALP). The Profit Level Indicator (PLI) chosen for the purpose of comparison of the assessee s profit margin with that of all the comparable companies was Operating Profit to Operating Revenue (OP/OR) for License manufacturing segment and Operating Profit to Operating Cost (OP/OC) for Contract manufacturing segment. 5. The assessee filed return of income on 30.11.2013 admitting an income of Rs.83,73,94,460. The case was selected for scrutiny and notice u/s. 143(2) of the Act was issued. As the international transaction of the assessee with its Associated Enterprise (AE) exceeded Rs.15 crores, the case was referred to the TPO to determine the ALP. The TPO made several TP adjustments to the tune of Rs.50,21,44,842. The AO passed the draft assessment order incorporating the TP adjustment and in addition, made the following disallowances towards corporate tax:- (i) Disallowance of depreciation Rs.4,39,35,813 (ii) Disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Operating profit/Sales 5.52% 9. The assessee selected the following comparables and arrived at an average margin of 5.80% on sales S.No. Name of the company OP/OR (%) 1. Akasaka Electronics Ltd 3.63 2. Centum Electronics Lts 5.66 3. Circuit Systems (India) Ltd 2.98 4. Cosmo Ferrites Ltd 8.78 5. EasunReyrolle Ltd 5.39 6. Incap Ltd 2.87 7. Kaycee Industries Ltd 5.39 8. MMG India Pvt Ltd 6.21 9. Ruttonsha International Rectifier Ltd 11.29 Average 5.80 Since the OC/OR of the assessee is within +/- 5% of the average margin of the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x (`PBIT') filter as a comparability criterion. Akasaka Electronics Limited Centum Electronics Limited Circuit Systems (India) Limited Cosmo Ferrites Limited MMG India Private Limited 7. That the learned DRP has erred, in law and in facts, in upholding the approach of the learned AO/learned TPO in accepting/ rejecting certain companies with respect to the Licensed Manufacturing segment based on unreasonable comparability criteria. Erroneously rejected by the learned TPO/ learned DRP, sought to be included by the Appellant Incap Limited Kaycee Industries Limited Ruttonsha International Rectifier Limited Easun Reyrolle Limited Erroneously accepted by the learned TPO/ learned DRP, sought to be rejected by the Appellant Jtekt Sona Automotive India Limited Roots Industries India Limited Roop Telesconic Ultrasonix Limited. Remi Elektrotechnik Limited. 13. During the course of hearing the ld AR did not press for the following (i) Inclusion of MMG India Private Limited and Easun Reyrolle Limited (ii) Exclusion of JtekSona Automotive India Ltd., Roots Industries India Ltd., and Remi Elektrotechnik Ltd. 14. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business segment of Capital Trust and found that in the foreign consultancy segment with which the Bench was concerned in the year 2004-05, it had operative profit / operative cost at 27.25%. Since the nature of services rendered by comparable were exactly on similar lines as that of the assessee, though, during the year, it was in the loss could not be disqualified as nonlegitimate comparable. The Tribunal drew strength from Brigade Global services (supra) for reaching this conclusion and held that the assessee had rightly taken Capital Trust as valid comparable and the Revenue authorities have erred in excluding the same. A similar view has been taken by ITAT, Mumbai K Bench in the case of Temasek Holdings Advisors vs. DCIT. In sum and substance, all the above cases is that the company making persistent loss for past 3 years is not good comparable. According to us, when loss making company has been selected for comparison in TP study for necessary, which is profit making one, there is a need for more attention qua the conditions prescribed in clause (a) to (d) of Rule 10B(2) of IT Rules, 1962 for an ultimate judgment of comparability of impugned transaction . So, the persisten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding the comparables selected by the assessee in the Transfer Pricing study report. We, therefore, find no justification to the adjustment made u/s.92CA(3) of the Act. We accordingly delete the same. In the result, relevant grounds are allowed. 16. Thus, in view of the fact that the comparables F I Sofex Limited and Fortune Informatics Limited although were having loss in the year of comparison but whether they were consistent loss making companies has not been ascertained by the TPO before rejecting the same. A company is said to be bad comparable if it is a consistent loss making entity. Accordingly, we are of the opinion that this issue needs a revisit to the Assessing Officer. The Assessing Officer after considering the submissions of the assessee and documents on record shall decide the issue afresh in the light of the decisions discussed above. Accordingly, this ground of appeal of the assessee is allowed for statistical purpose. 17. In the given case, we notice that the three of the comparable companies in the FY 2011-12 one company in 2012-13 and have earned profits and therefore following the ratio laid down in Affinity Express India P Ltd (supra), we hold that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an independent search and included Roop Telsconic Ultrasonix Ltd. as comparable. The assessee submitted that this company is engaged in the manufacture of ultrasonic equipments which is different from the cable coils and connectors manufactured by the assessee. However, the TPO rejected the contention of the assessee stating that this company is engaged in the manufacture of electronic component/instrument. 24. Before the DRP, the assessee reiterated the submissions made before the TPO and also submitted that this company is functionally different from the assessee and same cannot be included. The assessee also submitted the extract of P L account to support its contention. The DRP, however, upheld the order of the TPO. 25. Before us, the ld. AR submitted that Roop Telsconic Ultrasonix Ltd. is engaged in a product manufacture of ultrasonic equipments, whereas the assessee is manufacturing components, switches, cables, relays and connectors. He drew our attention to relevant extract of P L account of this company at Pg.231 of PB to submit that the product sold by that company mainly consist equipments. Therefore there was no functional comparability between the assessee and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. 28. We notice that the P L account of Roop Telsconic Ultrasonix Ltd. shows that it manufacture consists of ultrasonic equipments which support the claim of the ld. AR that it is into product manufacturing. In determining the degree of comparability between controlled and uncontrolled transactions, it is necessary to compare the significant risks that could affect prices or profits. The risk involved for a company involved in manufacturing of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.91 32. Accordingly the TPO proposed the TP adjustment of Rs.1,68,16,247 as follows:- (in Rs.) Operating cost 35,77,08,715 Arm s length margin 5.91% Arm s length Cost (ALP) @ 105.91% of operating cost 37,88,49,300 Revenue as per books 36,20,33,053 Difference being adjustment u/s. 92CA 1,68,16,247 33. The assessee has raised ground No.6 as follows:- 6. That the learned DRP has erred, in law and in facts, in upholding the approach of the learned AO/learned TPO in accepting/ rejecting certain companies with respect to the Contract Manufacturing segment based on unreasonable comparability criteria. Erroneously rejected by the learned TPO/ learned DRP, sought to be included by the Appellant Electronica Machine Tools Limited Polymechplast Machines Limited Erroneously accepted by the learned TPO/ learned DRP, sought to be rejected by the Appellant Vikram India Limited T I Global Limited 34. The inclusion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore us, the ld. AR submitted that Vikram India Ltd. is into manufacture of agricultural machineries which are used for tea, rice, coconut and other plantation industries and the company is also involved in trading activities. Hence this company is not functionally comparable with the assessee. 40. We notice that Vikram India Ltd. is engaged in the business of manufacture and sale of complete range of processing machinery, tools, spare parts and accessories and is also involved in trading activities as seen from the disclosure of principal product or services of this company as under:- 41. As per Rule 10B of the Income Tax Rules, which we have discussed in the preceding paragraphs, the comparability of the companies should be made with respect to functions, assets and risks. In the given case, Vikram India. Ltd. which is into manufacturing activities is not functionally comparable with the assessee and therefore, we delete the inclusion of this company from the comparables. 42. Ground No.8 reads as follows:- 8. That the learned DRP has erred, in law and in facts, in upholding the approach of the learned AO/ learned TPO in not providing working capital adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pugned order. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT (A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT (A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows: (3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of compariso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l company, present in multiple countries, is required to have an integrated approach in its operations wherein the requirement of an ERP implementation arises. As TE Group did not have a uniform pre-existing ERP package that could cater to multiple entities having varying modules, hence the requirement of consistent ERP for the Group as a whole, which was decided to be SAP worldwide. Given the use of such services across the various entities in the Group, the costs pertaining to the same were charged to the respective entities based on the extent of the utilization. TE US' IT shared services center ( TEIS Shared Services organization') is the global organization that provides information technology ( IT') services to the TE Group entities worldwide. Predominant part of the activities in the TEIS Shared Services organization resides in Harrisburg, Pennsylvania. However, it also has presence in various TE entities in Germany, Singapore, Brazil and Hong Kong. The costs incurred by the TEIS Shared Services organization are charged to beneficial legal entities. The IT service expenses of the non-US entities, referred above, being part of the TEIS Shared Services organizatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncontrolled Price (CUP) or TNMM. The TPO held that the transaction of rendering intergroup services has to be separately analyzed and he applied the CUP method as the MAM. The TPO thereafter held that there was no evidence that services were rendered by the AE for which the assessee made payment. In this regard, the AO observed as follows: Thus the Taxpayer's agreement says that the AE would charge for services only to the extent of the costs incurred in providing such services to the Taxpayer. The Taxpayer produced copies of invoices raised by the AE. But this invoice does not contain any details of services provided and costs incurred for each type of service except stating as Charge Back IT Expenses . As can be seen from above, the invoice did not speak about anything on the nature of service rendered and costs involved except mentioning as Chargeback IT Exp . The Taxpayer did not adduce any primary evidence to show that the payment made is only to the extent of cost actually incurred in connection with rendering of services to the Taxpayer. Further, as per the above agreement, the AE shall keep accurate and adequate records of all support functions rendered to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e submitted that the allegation that no documentation / information was furnished by the Assessee before the lower authorities is incorrect. He gave the details of documents/information filed before the TPO in the following summary: IS charges are received pursuant to the Agreement for Support Functions entered with Tyco Electronics Corporation, USA, dated October 1, 2002 [refer Pg. 702 of Paperbook - Part B]; Corporate services rendered by Tyco electronics Limited, Switzerland, to TECIL primarily comprised of services in relation to (i) Financial Planning and analysis (ii) Treasury (iii) Taxes (iv) Legal and government affairs (v) corporate governance (vi) operational excellence (vii) Human resources etc. These services are rendered pursuant to the Corporate Services Agreement [refer Pg. 707 of Paperbook - Part B]; The nature of services received, basis of quantification of such services provided by the Group, the basis for such apportionment and the cost allocation keys depicting the nature of the costs were provided in SCN response [refer Pg. 785 of Paperbook - Part B]; The cost centre details of Corporate Service charges were filed as part of additional evidence bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out prejudice to the above contentions, it was contended that the TPO has failed to undertake a benchmarking analysis based on comparable transactions which is a mandatory requirement for the application of the CUP method, which is also recognized by several precedents: 20. The learned counsel for the assessee pointed out that in respect of the said adjustment for AY 2009-10, the DRP, considering the submissions made by the assessee, concluded that the entire value of the IS charges cannot be Nil . It further held that the portion of expenses in respect of costs allocated based on per user basis shall be allowed since the facilities/services have been utilised by the assessee and allowed the same [Pg. 824 of Paperbook - Part B]. The said directions were given effect to by the AO and consequentially the TP adjustment to the extent of expenses rendered on per user basis stood deleted [Pg. 838 of Paperbook - Part B]. Relying on the said directions, similar direction was issued by the DRP for AY 2010-11 as well, on the same facts [Pg 852 of Paperbook - Part B]. It was submitted that though the principle of res judicata is not applicable to tax matters, the Supreme Court in var ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdingly. 50. Ground No. 10 is as follows:- 10. That the learned DRP has erred, in law and in facts, in upholding the approach of the learned AO/ Learned TPO in not granting proportionate adjustment, thereby ignoring the fact that any transfer pricing adjustment should be restricted to the amount of international transactions only. 51. The coordinate bench of the Tribunal in the case of IKA India (P.) Ltd. (supra) dealt with the similar issue and held that section 92 of the Act can be applied only in respect of international transactions i.e., transactions with AE. The relevant observations are as follows:- 54. We have heard the rival submissions. The ld. counsel for the assessee reiterated submissions made before the CIT(A) that transaction with non-AE cannot be subject matter of determination of ALP because section 92 clearly speaks of determination of ALP only in respect of transactions with AE. He also referred to certain decisions of the Tribunal for the proposition that section 92 of the Act is not applicable to non-AE transactions. These decisions have already been extracted in the earlier paragraphs. The ld. DR relied on the order of the CIT(Appeals). 55. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed DRP has erred in disallowing additional depreciation amounting to INR 2,18,20,290/- claimed by the Appellant on additions made to the 'plant and machinery' block of assets during the year. 14. That the learned AO/learned DRP has erred in not appreciating the fact that the assets purchased during the year under consideration and categorised under the block 'plant and machinery' satisfied the conditions specified under section 32(1)(iia) of the Act, as certified in the tax audit report issued by the Chartered Accountant and accordingly the Appellant was eligible to claim additional depreciation on such assets at the rate of 20% for the AY 2013-14. 15. That the learned AO/learned DRP has erred in not appreciating the fact that the Appellant's eligibility to claim depreciation is substantiated in the tax audit report issued under section 44AB of the Act and particulars given in Form 3CD are found to be 'true and correct' as per the Audit Report in Form 3CA certified by the Chartered Accountant. 16. That the learned AO/learned DRP has erred in not appreciating the fact that the Appellant should not be deprived of benefit under section 32 of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the dealers who are also the customers is in the nature of discount on special price clearance quote and is not in the nature of 'commission' payments warranting deduction of tax at source under section 194H of the Act. 21. That on the facts and circumstances of the case, the learned AO/learned DRP has erred in disallowing special discount given to dealers who are also its customers amounting INR 32,11,54,279 under section 40(a) of the Act as the amount is not subject to withholding tax. 22. That the learned AO/learned DRP erred in disallowing special discount without appreciating the fact that: Discounts given to the dealers who are also its customers are genuine; Discounts given was for the purpose of business of the Appellant; Discounts being given were based on certain customs and trade practices prevalent in the industry in which the Appellant operates; and Accordingly, discounts should be allowed as tax deductible expenditure under section 37 of the Act. 23. That the learned AO/learned DRP has erred in law and on facts by not following the principles of commercial expediency. 24. The learned DRP has erred by not considering the sample co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e a party agrees to act as a Regional Distributor ( RD ) and signs an agreement, such RD shall abide by the conditions of the agreement and shall be eligible to receive price discount on the distributor price. The discount given to distributors on the sale price is sales discount in normal business parlance and not commission on sales. All such agreements clearly define the relationship between both the parties as principal to principal which is evident from the terms of the said agreement. Hence the said dealers were not acting as the agents of the Appellant. ii. The reason for issuance of debit notes periodically on a consolidated basis, instead of billing the net sale price post such discounts for each transaction, is purely on account of the operational process and commercial practice adopted in this regard. These discounts are made known to the dealers even before they purchase goods from the Appellant company and quantification thereof is possible only at the end of the quarter/period as specified in the agreement. The dealers fulfilling the qualification conditions become eligible to get discount at the end of the notified period, processed by way of debit notes. iii. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cited and the real nature of the transaction and not to conclude only on the basis of entries in books of accounts and nomenclature used therein. The AO and TPO will afford opportunity of being heard to the assessee in the set aside proceedings. 59. Respectfully following the above decision of the Tribunal, we set aside the issue to the AO/TPO for fresh consideration with similar directions as in AY 2014-15. 60. Ground Nos. 25 to 27 regarding disallowance of liquidated damages are as under:- 25. That the learned AO/learned DRP has erred in disallowing liquidated damages amounting to INR 20,33,797/- without appreciating the fact that: Liquidated damages paid are genuine; Liquidated damages were paid during the course of carrying out business of the Appellant; and Accordingly, liquidated damages are allowable as tax deductible expenditure under section 37 of the Act. 26. That the learned AO/learned DRP has erred in law and on facts by not following the principles of commercial expediency. 27. That the learned DRP has erred in not considering the sample copies of invoices provided during the course of DRP proceedings. 61. The AO disallowed the claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jected the claim stating that slump sale is a transfer of undertaking as a whole and no deduction towards any liability can be allowed on the same. He also stated that the assessee has not provided any proof as to how the amount of Rs.94.70 lakhs is arrived at. 66. The DRP confirmed the action of the AO on the ground that the transfer is a slump sale and there is no reason why the said amount was not part of the net worth computed while arriving at the sale consideration and the capital loss. 67. Before us, the ld. AR submitted that the buyer did not pay the whole consideration originally agreed and had reduced the said amount of Rs.94.70 lakhs while paying the final consideration towards some expenses. Therefore, the assessee offered the net income while computing the capital gain on slump sale. He also submitted that the certificate from Chartered Accountant in Form 3CEA u/s.50B of the Act was obtained [page 681 of PB] and was submitted before the lower authorities which is sufficient proof for the claim. 68. We heard the rival submissions. The assessee has submitted Form 3CEA to substantiate that the capital gain / loss is computed correctly. The certificate from the ch ..... X X X X Extracts X X X X X X X X Extracts X X X X
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